Inflation risks in the Gulf countries are resurfacing after undergoing a sharp fall in consumer prices from a peak of 11 percent in 2009, Credit Suisse said in its latest issue of Global Investor. Fears of possible inflationary outcome of the recent drastic monetary and fiscal policy measures taken by central banks and finance ministers in response to the global financial crisis have in many quarters kindled fears of possible inflationary consequences. Average inflation in the GCC is estimated at two percent year on year in 2009, after 11 percent year on year in 2008. Analysts see inflationary pressures growing across the GCC. This is based on their assumption that commodities will continue to rise, and their forecast that the dollar will weaken, the report said. Credit Suisse analysts said, however, for most industrialized nations these types of risks remain moderate for now. In the emerging markets, on the other hand, the inflation risks are growing. Should the dollar hold up, inflation risks will be lower, they contend. “Moreover, while the economic outlook remains positive for the overall region, the gradual recovery most likely will limit domestically driven inflation pressures.” The strongest change in inflation was observed in Qatar while inflation remained fairly low and steady in Bahrain, according to Credit Suisse analysts. In the same light, NCB Capital, the investment arm of National Commercial Bank, said in a report that resurging inflation looms large in the region as global commodity prices rise over growing demand. In the backdrop of rising oil prices and other commodity prices, GCC nations could again face soaring domestic prices. According to NCB Capital, GCC countries could find it difficult to deal with high inflation levels for the time being as they have to keep interest rates low as part of their counter-crisis expansionary fiscal policies. In 2008, the surge in commodity prices was both a source of strength but also of increased vulnerability in the GCC economies. The rise in food prices put upward pressure on inflation - food and rent subcomponents represent around 50 per cent of various consumer price index, or CPI, baskets. “Higher energy prices lead to a windfall in oil revenues, supporting strong economic growth and liquidity. Considerable increases in liquidity boosted credit expansion and a spending boom, which lead to supply side bottlenecks, especially in real estate,” Credit Suisse analysts said. The GCC currencies' US dollar peg is seen as another reason for the swings in inflation. “Prior to the financial crisis, the weakness of the dollar generated additional inflation pressure via import prices. In contrast, the surge of the dollar during the financial crisis deepened the decline in inflation. Finally, the sharp decline in housing prices in some parts also contributed to an easing of inflationary pressures.”
